Infosys Results Disappoint – Muted Guidance

Infosys reported Q3FY11 below expectations. Revenues grew 2.3% QoQ in Re and 6% Q/Q in USD terms (4.7% in CC) driven by 1) 3% Q/Q volume growth (vs. 7%QoQ expectations), 2) offshore pricing improvement of 2.6% QoQ (1.6% blended QoQ) and 3) cross currency benefits. Margins were flat QoQ despite currency headwinds, led by improvement in pricing. The weaker-than-expected revenue and 4Q topline guidance will result in lower exit rate on revenues going into FY12.

Pricing improved 2.6% offshore (1.4% CC), 2) Reported attrition was at 17.5% flat QoQ and net addition was lower at 5,311 (7,646 in Q2), 3) Utilisation edged lower to 71% (74% in 2QFY11), 4) Europe saw a soft 3.7% CC QoQ growth, while Americas growth came off to 4.2% CC (7.5% CC in 2Q).

Infosys management indicated that: (a) IT budgets are expected to be flat to marginally up and CY11 is likely to be a normal
year for the industry; (b) Expect volatility due to uncertainty in the environment; (c) Slightly negative on Europe; Positive on North America; (d) Pricing uptick will take time – sporadic cases of price uptick; (e) Making ~26k campus offers for next year.

Overall a disappointing quarter from Infosys with soft volume growth and a muted guidance for 4QFY11. While the near term demand
momentum remains good, we believe that expectations are running ahead of on ground fundamentals.

Infosys FY 2012 EPS expectations is between Rs 145 on the base case to Extremely bullish case of Rs 160 a growth of 20% over FY 2011 thus makign the stock fully valued at current market price.